What’s new

• We met UMW Aerospace Sdn Bhd’s team and visited its new manufacturing plant for Rolls Royce fan case in Serendah recently. We came back feeling reassured about the Group’s rationalization plans as well as its aerospace business.

Comment

• Rolls-Royce recognizes UMW Aerospace as its Tier 1 supplier for fan cases. In Aug 2015, UMW signed a 25+5 year contract with Rolls Royce to manufacture fan cases for Trent 1000 & 7000 engines, which used in Boeing 787 Dreamliner and Airbus A330neo. Since then, the Group has invested RM750m to build the manufacturing plant with c.30% cost to manufacture the fan cases. The land in which UMW Aerospace occupies currently is rented from UMW Corporation. The fan cases produced in UMW's Serendah facility will be handed over by truck to Rolls Royce's engine assembly and test facility in Seletar Aerospace Park, Singapore. Rolls-Royce recognizes UMW Aerospace as its Tier 1 supplier for fan case since the Group is the only external supplier to supply fan case to Rolls-Royce.

• Break-even expected in FY19. UMW Aerospace has delivered its first unit of fan case in Nov’17 and has completed 6 units of fan case in 2017. The Group expected to ramp up another 80 units and 160 units of fan cases in FY18 and FY19 respectively with full capacity of 250 units fan cases in 2020. Break-even will likely in FY19 onwards as the Group’s aerospace business will remain losses, bearing high operating cost to build up the plant and high depreciation charges. Thereafter, the Group expects to see a double-digit revenue and net profit growth from the Manufacturing and Engineering (M&E) segment by 2021. Thus, we would see the M&E segment’s contribution to the Group level to increase to 10% from current contribution of around 5%.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY17F while revise upwards our earnings forecasts for FY18F by 24.3% in view of better car sales performance, diminishing losses from its non-listed oil and gas segment following its disposal of assets and recovery in crude oil prices, and narrowing losses from M&E segments.

Valuation & Recommendation

• Maintain HOLD call on UMW with a higher target price of RM6.00 (previously RM5.20) following our earnings upgrade. Our valuation for UMW is currently revised to 23.1x FY2018F PE based on EPS of 26 sen. The target PE valuation is close to its mean PE of 22x. While we reckon that the worst is over for the Group, we have yet to see any catalyst to drive the share price. We are still cautious on its outlook, as affected by some downside risks such as tepid consumer sentiment and fluctuation in foreign exchange.

Source: JF Apex Securities Research - 11 Jan 2018